by Al MartinThe Bullish Gold Conspiracy Takes a Tumble
(6-26-13) Gold continues to move south, and as we have been saying on our sister site Insider Intelligence.com – short the Gold. Here’s why…
Several weeks ago, we wrote that the price of Gold is moving down to the price of production which is about $1100 per ounce. On Monday June 24, Gold went to 1268, which is down 24% for this year.
$1100 -- that’s where I thought Gold was going all along. It will come down for a test of $1100 because Gold has to come down to somewhere near its production cost to take Gold off the market. In other words, a rally in the metal reduces the supply of it, and when you reduce the supply, it’ll bring it down to its production cost.
According to Bloomberg, Barrick and Newmont are writing down the value of its mines as the metal traded as low as $1,277.20 on Monday. Also you’ve seen Rio Tinto cut back production and there are mines that are being closed because under $1300 an ounce they can’t make money. Previously $1600 was the target when they were developing the mine. In other words, $1600 is what they need to stay in business to make money.
However this is nothing new. It’s the same old cycle. We saw the same situation with the Gold in 1979 and 1980 when Oil was at 79.80. High prices bring out production but eventually that production weighs on the markets, as is happening in Gold now. What the financial media shills don’t like to talk about is that new mine supply is rising and as a matter of fact it’s rising quite dramatically.
Meanwhile there’s the relationship between the Bonds and the Dollar, which we saw last week, when the Bonds got hammered which then caused a rally in the Dollar, which pressured the Euros throughout the week – which in turn pressured the Gold.
This is Economics 101. The Bonds were causing the action in all markets last week. That’s why when you saw the Bonds lift on Monday -- which I bought at 33-3/4 – the equity markets came off their lows and they had a big move. The Dow was down at least by 240 and closed down at 140, but by 3:00 was down by only 40. The spoos had about a 20 handle range – and that was all action in the Bonds. When the Bonds which were terribly oversold and began to lift they got hit again in the overnight session, it lifted the equities off the lows.
What’s going to happen this week is you’re going to see the Federal Open Market Committee is going to try to back-pedal and try to get Bernanke out of his screw-up. That back-pedaling began with Richard Fisher, who is considered to be the most hawkish of the board, when he backed off and said that he does not support a “tapering” of QE and that he does not want to see the economy go from Wild Turkey to Cold Turkey. He was the leading critic of QE on the board, so when he made those comments on Monday and then Board member Kocherlakota came up with this idea that the Fed had before of matching Bond repurchases with market direction -- that helped turn around the Bonds.
Bonds turned around and equities turned around. The Euros lifted and Gold sold off.
What this means is that this was “necessary” jawboning and backpedaling from the FOMC when the Chairman (Bernanke) made a “mistake.” Why? He doesn’t understand markets because he’s an academic. That’s the endemic problem of having an academic as a Fed Governor.
The only time you have liberal academics in this position is during liberal regimes and they always make a mess because they’re not market people and they have no experience in trading markets. It’s only when you get Republican regimes that you have Fed Governors who do have experience in the Real World.
So what should Bernanke have said? First of all he wouldn’t have been hedging his bets, and that’s been the problem with QE 3 because unlike QE 1 and QE 2, they left QE 3 open and they didn’t have a fixed termination date. That was a mistake right away because when you leave it open like that and you say we’re gong to repurchase $85 billion a month of mortgage paper and Treasuries and then you leave it as an open-ended arrangement, the problem is that it continuously injects “pabulum” into the equity markets. Then when you finally start making noises that you’re going to withdraw or “taper off” those purchases the equities fall.
Bernanke is making the same mistake that he always talks about being frightened of making – the 1937 Mistake as he calls it -- when the Fed made the biggest mistake ever. The Fed tried to raise interest rates and reduce liquidity in the spring of ’37 – too soon. That’s when the markets went south in a hurry. As a matter of fact by the August of ’37 the markets had backed down almost to the lowest point they had been during the great trough of 1932. The Fed managed to undo all of the economic stimulus it had mounted throughout the 1930s because in the course of 4 or 5 months by making the mistake of withdrawing monetary stimulus too soon during the Great Depression. That’s what Bernanke has always harped about. But in fact he has made that mistake.
The Fed created the uncertainty in the markets because of the original representation Bernanke made by saying it’s an open-ended deal and don’t worry, we’re not going to “taper” until the unemployment comes down to 6-1/2% and the inflation rate continues to fall saying we know we have plenty of room to repurchase securities and we’re not going to raise interest rates until 2015.
The problem is that what Bernanke has said recently isn’t the original deal here vis a vis QE 3. That’s where the uncertainty comes from since he has created the uncertainty in an effort to unwind or “taper” down or at least put the markets on notice that a “tapering” down is going to begin. The way it certainly sounded is that it wouldn’t begin this year but would probably begin in January – even though the Fed’s monetary stimulative targets have not been reached yet. That’s what the market is responding to.
As far as Gold is concerned, 1200 is the next level down to look at because now you have to go back 3 years or more because Gold is now at a 3 year low. The reasons for owning Gold have changed. Now you don’t have the nervousness over Europe or in Asia that there was 6 or 12 months ago – which was forcing the Gold higher. This despite the fact that the situation both in Europe and Asia have actually deteriorated – but there’s not a recognition of that because of this façade of calm that the shills have been able to engineer in the domestic equity markets. And that’s all it is – a façade because the rest of the world is falling apart.
Gold ETFs have been dropping for 6 consecutive weeks, and there’s no surprise about that. It is the Gold coming out of the ETFs and going back in the market that have been pressuring the price The problem with the ETFs is that it’s a two-way street. The shills never talk about it. They talk about it like it’s a one way street – oh look how much bullion will be taken off the market by the ETFs. However when people sell their ETF shares, that bullion comes back on the markets. They’re not this wildly bullish phenomenon that the shills would have the Unwashed believe.
A shill’s job is to continuously shill markets higher. You can call them barkers, shills or touts. These are the ones you see on financial media because everyone makes money when markets go higher. That’s how a speculative top or bubble is made that Smart Money can short into – and leave the Unwashed as the bag-holders. That is the shills’ job ultimately. Then you’ve left a lot of Dumb Money bag-holders in both the Gold and the Silver because they don’t understand economics. You see this every day – the shills work hand in hand in financial media with those who have a vested interest in higher prices – those who sell Gold and Silver and those who mine it. They work with the whole Bullish Conspiracy -- everyone who has a vested interest in higher prices.
In the last analysis, however, you can’t get away from the old-fashioned underlying supply/ demand fundamentals. Higher prices bring out more product and that’s what happened with Gold, Silver and Copper.
You’ve now had 3 years of sustained prices in the Gold at 1200, since Gold went as high as 1800. That’s now backed off but that 3 years is now long enough to bring in what was previously marginal production to market and into the supply chain.
The amount of bullion coming in – what’s called new mined bullion, i.e. Gold, Silver, Copper is rising now. The amount of new mined bullion coming into the markets is 30% more than it was 4 years ago.
Meanwhile the shills like to tell everybody – don’t worry about it because it takes 10 years just to develop a Gold mine. They’re right. To start from the bare earth and take that bare earth covered with a forest into production where there/s actually Gold coming out the other end – that’s a 10 year process.
What they’re not saying however is how many mines were already in X, Y or Z state of development as the prices rose and how that development would get accelerated because suddenly mining companies could spend more money to accelerate that production -- because the difference between their underlying cost of production and the market value of the Gold kept widening out. This allowed them a greater spread which in turn allowed them to spend the money to accelerate the production.
In conclusion – Gold, Silver and Copper should be traded from the short side on rallies.

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.